1977 (4) TMI 16 - HC - Income Tax

Business Expenditure Capital Employed Deduction From Profits And Gains Industrial Undertaking

Issues Involved:
1. Permissibility of deduction under section 37(1) of the Income-tax Act, 1961, for research expenses.
2. Inclusion of the value of capital work-in-progress in the computation of capital employed for relief under section 84(1) of the Income-tax Act, 1961.
3. Entitlement to relief under section 84 of the Income-tax Act, 1961, for profits from the wire mill unit used as raw material in the electrode factory.

Detailed Analysis:

Issue 1: Permissibility of Deduction for Research Expenses
The first issue revolves around whether the sum of Rs. 3,40,053 paid by the assessee to M/s. British Oxygen Ltd. qualifies as a permissible deduction under section 37(1) of the Income-tax Act, 1961. This question has been previously addressed in Income-tax Reference No. 78 of 1970 in the case of the same assessee (Commissioner of Income-tax v. Indian Oxygen Ltd. [1978] 112 ITR 1025 (Cal)). Following that precedent, the court answered the question in the affirmative and in favor of the assessee.

Issue 2: Inclusion of Capital Work-in-Progress in Computation of Capital Employed
The second issue concerns whether the sum of Rs. 2,96,259 representing the value of capital work-in-progress at the beginning of the previous year should be included in the computation of the capital employed for the purpose of working out the relief under section 84(1) of the Income-tax Act, 1961.

Section 84(1) of the Income-tax Act, 1961, stipulates that income-tax shall not be payable by an assessee on profits derived from any industrial undertaking to which this section applies, as long as it does not exceed six percent per annum on the capital employed in the undertaking, computed in the prescribed manner. Rule 19 of the Income-tax Rules, 1962, elaborates on the computation of capital employed, categorizing it into assets acquired by purchase (both entitled and not entitled to depreciation), debts due to the business, and other assets.

The Tribunal accepted the assessee's contention that the proviso to rule 19(1) applies only to assets acquired within the computation period, necessitating the computation of average cost and relevance of actual user of the asset. If an asset existed throughout the computation period, it should be included in the capital employed. The court, agreeing with the Tribunal, held that the moment capital is utilized for acquiring any asset for business purposes, it becomes employed in the business, regardless of its actual use. This view aligns with the majority opinion in the case of Birmingham Small Arms Co. Ltd. [1951] 2 All ER 296 (HL) and the Madras High Court's decision in Jayaram Mills Ltd. [1959] 35 ITR 651. Consequently, the court answered the question in the affirmative and in favor of the assessee.

Issue 3: Entitlement to Relief for Profits from Wire Mill Unit
The third issue pertains to whether the assessee is entitled to relief under section 84 of the Income-tax Act, 1961, for profits from the wire mill unit, considering that its products were used as raw material in the manufacture of electrodes at the electrode factory. This question is covered by the Supreme Court's decision in Textile Machinery Corporation Ltd. v. Commissioner of Income-tax [1977] 107 ITR 195. Following this judgment, the court answered the question in the negative and in favor of the assessee.

Conclusion:
The court's judgment addressed three key issues:

1. The deduction for research expenses under section 37(1) was affirmed in favor of the assessee.
2. The inclusion of capital work-in-progress in the computation of capital employed under section 84(1) was also affirmed in favor of the assessee.
3. The relief under section 84 for profits from the wire mill unit was granted, with the court ruling in favor of the assessee based on the Supreme Court's precedent.

In conclusion, all questions were answered in favor of the assessee, and there was no order as to costs.

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